A trade group representing non-bank financial institutions that provide sales-based financing to businesses has filed a lawsuit against the Consumer Financial Protection Bureau claiming it has overstepped its authority by issuing a rule regulating how lenders must collect and submit data related to small business lending activities.
The Background: The rule, which was issued under Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was finalized last March. Lenders are supposed to start submitting information — such as the race, ethnicity, and gender of small business loan recipients as well as decisions about whether to extend credit or not and the price of the credit that is extended — this October.
- Congress repealed the rule three months ago, but President Biden vetoed the repeal.
- A federal judge in Texas has suspended enforcement of the rule, but only for plaintiffs in a separate lawsuit that had been filed against the CFPB.
The New Suit: In the new suit, the Revenue Based Finance Coalition is claiming that sales-based financing does not meet the definition of “credit” and that Section 1071 only applies to applications for credit. Sales based financing is a lump sum paid to a small business in exchange for a percentage of that business’s future sales or income.
- The claim is that the CFPB has violated the Administrative Procedures Act by including sales-based financing in its definition of credit.
- The plaintiff makes three arguments why the rule is unlawful: sales-based financing should not be considered as credit, it burdens one group of market participants while benefitting others, and the CFPB failed to consider the benefits that sales-based financing brings to small businesses.
